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Sunday, May 11, 2014

Section 80HHC of the Income Tax Act - manufacturer and exporter of stainless steel utensils. - Total TURNOVER- whether the selling of scrap comes under total turnover - Apex court held that High Court is in conformity with the normal accounting practice followed by the traders, including the respondent-assessee and it was justified in coming to a conclusion that the proceeds generated from the sale of scrap would not be included in the ‘total turnover’. - and as such dismissed the appeal =Commnr. of Income Tax-VII, New Delhi Appellant Versus Punjab Stainless Steel Industries Respondent= 2014 ( May.Part) http://judis.nic.in/supremecourt/filename=41507

Section 80HHC of the Income Tax Act - manufacturer and exporter of stainless steelutensils. - Total TURNOVER- whether the selling of scrap comes under total turnover - Apex court held that High Court is in conformity with the normal accounting practice followed by the traders, including the respondent-assessee and it was justified in coming to a conclusion that the proceeds generated from the sale of scrap would not be included in the ‘total turnover’. - and as such dismissed the appeal =

The assessee is a manufacturer and exporter of stainless steel utensils. In the process of manufacturing stainless steel utensils, some portion of the steel, which can not be used or reused for manufacturing utensils, remains unused, which is treated as scrap and the respondent-assessee disposes of the said scrap in the local market and the income arising from the said sale is also reflected in the profit and loss account. The respondent-assessee not only sells utensils in the local market but also exports the utensils. 7. For the purpose of availing deduction under Section 80HHC of the Act for the relevant Assessment Year, the assessee was not including the sale proceeds of scrap in the total turnover but was showing the same separately in the Profit and Loss Account. 8. According to the Revenue, the sale proceeds from the scrap should have been included in the ‘total turnover’ as the respondent- assessee was also selling scrap and that was also part of the sale proceeds.= The intention behind enactment of Section 80HHC of the Act was to encourage export so as to earn more foreign exchange. For the said purpose the Government wanted to encourage businessmen, traders and manufacturers to increase the export so as to bring more foreign exchange in our country. If the purpose is to bring more foreign exchange and to encourage export, we are of the view that the legislature would surely like to give more benefit to persons who are making an effort to help our nation in the process of bringing more foreign exchange. If a trader or a manufacturer is trying his best to increase his exports, even at the cost of his business in a local market, we are sure that the Government would like to encourage such a person. In our opinion, once the Government decides to give some benefit to someone who is helping the nation in bringing foreign exchange, the Revenue should also make all possible efforts to encourage such traders or manufacturers by giving such business units more benefits as contemplated under the provisions of law. 29. For the aforesaid reasons, we are of the view that the view expressed by the High Court is in conformity with the normal accounting practice followed by the traders, including the respondent-assessee and it was justified in coming to a conclusion that the proceeds generated from the sale of scrap would not be included in the ‘total turnover’. 30. For the aforesaid reasons, we dismiss the appeal with no order as to costs. 2014 ( May.Part) http://judis.nic.in/supremecourt/filename=41507ANIL R. DAVE, DIPAK MISRA
REPORTABLE

IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 5592 OF 2008

Commnr. of Income Tax-VII, New Delhi Appellant

Versus

Punjab Stainless Steel Industries Respondent

WITH

Civil Appeal Nos. 3283 and 4491 of 2009 and 4898 of 2010

1 J U D G M E N T

1 ANIL R. DAVE, J.

1. Being aggrieved by the judgment delivered in ITA No. 520 of 2006
dated 19th January, 2007, by the High Court of Delhi, this Appeal
has been filed by the Commissioner of Income Tax.
2. The facts giving rise to the present appeal, in a nutshell, are as
under:
So as to encourage export for the purpose of earning foreign
exchange, Section 80 HHC has been enacted in the Income Tax Act,
1961 (hereinafter referred to as ‘the Act’). By virtue of the
provisions of the said section, subject to certain conditions, the
exporter gets certain deduction from the income, which is derived
from the profits from export of goods, while computing taxable
income.
3. For the purpose of calculating the deduction, according to the
provisions of Section 80HHC of the Act, one has to take into account
the profits from the business of the assessee, export turnover and
total turnover. The deduction, subject to several other conditions,
incorporated in the Section, is determined as under:
Profits of the Business X Export Turnover
Total Turnover

4. Thus, to determine the amount of deduction, the assessee and the
Revenue must be aware of the following three ingredients:
i) Profits of the business
ii) Export turnover
iii) Total turnover

5. In the instant case, the issue is with regard to the term “Total
turnover”.
6. The assessee is a manufacturer and exporter of stainless steel utensils. In the process of manufacturing stainless steel utensils, some portion of the steel, which can not be used or reused for manufacturing utensils, remains unused, which is treated as scrap and the respondent-assessee disposes of the said scrap in the local market and the income arising from the said sale is also reflected in the profit and loss account. The respondent-assessee not only sells utensils in the local market but also exports the utensils. 7. For the purpose of availing deduction under Section 80HHC of the Act for the relevant Assessment Year, the assessee was not including the sale proceeds of scrap in the total turnover but was showing the same separately in the Profit and Loss Account. 8. According to the Revenue, the sale proceeds from the scrap should have been included in the ‘total turnover’ as the respondent- assessee was also selling scrap and that was also part of the sale proceeds.
9. The assessee had objected to the aforestated suggestion of the
Revenue because inclusion of the sale proceeds of scrap into the
total turnover would reduce the amount deductible under the
provisions of Section 80HHC of the Act.
10. One can very well see that if the total turnover increases, the
advantage which the assessee would get under Section 80HHC would
decrease because the amount deductible substantially depends upon
the ratio between the export turnover and total turnover. If the
export turnover is higher, comparatively the amount deductible under
Section 80HHC would be more; or in other words, if compared to total
turnover, export turnover is less, the amount deductible from the
income under Section 80HHC would be reduced. By virtue of the
impugned judgment delivered by the High Court, the accounting method
followed by the respondent-assessee has been approved and therefore,
this appeal is filed by the Revenue.
11. The learned counsel appearing for the appellant-Revenue, had
vehemently submitted that even the sale of scrap is sale and the
proceeds which the respondent-assessee received from such sale
should be included in the ‘total turnover’. In the circumstances,
the total turnover must include the amount received by the
respondent-assessee from the sale of scrap.
12. It had been submitted by him that the respondent-assessee was
getting substantial amount from sale of scrap and the receipt from
the sale of scrap was a regular feature of its business. In the
aforestated circumstances, according to the learned counsel
appearing for the appellant-Revenue, the view expressed by the High
Court is incorrect because that would exclude substantial receipt of
the respondent-assessee from the total turnover and therefore,
according to him, the appeal should be allowed and the amount
deductible should be re-assessed after inclusion of the amount
received from the sale of scrap into the ‘total turnover’.
13. On the other hand, the learned counsel appearing for the respondent-
assessee had submitted that the proceeds of sale of scrap can never
be included in the ‘total turnover’ because the respondent-assessee
is not dealing in scrap. According to him, scrap is generated in
the process of manufacturing and the scrap is nothing but the raw
material which could not be used in the process of manufacturing and
therefore, sale proceeds of such scrap would merely bring down the
cost of raw material. Thus, the sale proceeds of the scrap can
either be deducted from the cost of raw material or can be shown in
the profit and loss account but the said amount can never be treated
as a part of ‘sales’ or ‘turnover’.
14. The learned counsel had also relied upon the judgment delivered in
the case of COMMISSIONER, INCOME TAX THIRUVANANTHAPURAM v. K
RAVINDRANATHAN NAIR [(2007) 15 SCC 1], which deals with the term
‘turnover’. According to him, though the said issue has not been
directly discussed in the said judgment, from the meaning of the
word ‘turnover’ given in the said judgment, it is very clear that
the term ‘turnover’ would include only the sale proceeds of the
articles manufactured and sold and not other things which are sold
by a business unit. He had also referred to the definition of term
‘business’ given in the Act.
15. According to him, had the respondent-assessee been doing business of
scrap, the sale proceeds of scrap would have been treated as a part
of ‘total turnover’ but as the respondent is not dealing in scrap,
the amount received from the sale of scrap can never be treated as a
part of the sale proceeds and therefore, he had submitted that the
view taken by the High Court is absolutely correct.
16. We had heard the learned counsel appearing for both the sides and
also considered the relevant record and the judgments referred to.
17. To ascertain whether the turnover would also include sale proceeds
from scrap, one has to know the meaning of the term ‘turnover’. The
term ‘turnover’ has neither been defined in the Act nor has been
explained by any of the CBDT circulars.
18. In the aforestated circumstances, one has to look at the meaning of
the term ‘turnover’ in ordinary accounting or commercial parlance.
19. Normally, the term ‘turnover’ would show the sale effected by a
business unit. It may happen that in the course of the business, in
addition to the normal sales, the business unit may also sell some
other things. For example, an assessee who is manufacturing and
selling stainless steel utensils, in addition to steel utensils,
the assessee might also sell some other things like an old air
conditioner or old furniture or something which has outlived its
utility. When such things are disposed of, the question would be
whether the sale proceeds of such things would be included in the
‘turnover’. Similarly in the process of manufacturing utensils,
there would be some scrap of stainless steel material, which cannot
be used for manufacturing utensils. Such small pieces of stainless
steel would be sold as scrap. Here also, the question is whether
sale proceeds of such scrap can be included in the term ‘sales’ when
it is to be reflected in the Profit and Loss Account.
20. In ordinary accounting parlance, as approved by all accountants and
auditors, the term ‘sales’, when reflected in the Profit and Loss
Account, would indicate sale proceeds from sale of the articles or
things in which the business unit is dealing. When some other
things like old furniture or a capital asset, in which the business
unit is not dealing are sold, the sale proceeds therefrom would not
be included in ‘sales’ but it would be shown separately.
21. In simple words, the word “turnover” would mean only the amount of
sale proceeds received in respect of the goods in which an assessee
is dealing in. For example- If a manufacturer and seller of air-
conditioners is asked to declare his ‘turnover’, the answer given by
him would show the sale proceeds of air-conditioners during a
particular accounting year. He would not include the amount
received, if any, from the sale of scrap of metal pieces or sale
proceeds of old or useless things sold during that accounting year.
This clearly denotes that ordinarily a businessman by word
“turnover” would mean the sale proceeds of the goods (the things in
which he is dealing) sold by him.
22. So far as the scrap is concerned, the sale proceeds from the scrap
may either be shown separately in the Profit and Loss Account or may
be deducted from the amount spent by the manufacturing unit on the
raw material, which is steel in the case of the respondent-assessee,
as the respondent-assessee is using stainless steel as raw material,
from which utensils are manufactured. The raw material, which is
not capable of being used for manufacturing utensils will have to be
either sold as scrap or might have to be re-cycled in the form of
sheets of stainless steel, if the manufacturing unit is also having
its re-rolling plant. If it is not having such a plant, the
manufacturer would dispose of the scrap of steel to someone who
would re-cycle the said scrap into steel so that the said steel can
be re-used.
23. When such scrap is sold, in our opinion, the sale proceeds of the
scrap cannot be included in the term ‘turnover’ for the reason that
the respondent-unit is engaged primarily in the manufacturing and
selling of steel utensils and not scrap of steel. Therefore, the
proceeds of such scrap would not be included in ‘sales’ in the
Profit and Loss Account of the respondent-assessee..
24. The situation would be different in the case of the buyer, who
purchases scrap from the respondent-assessee and sells it to someone
else. The sale proceeds for such a buyer would be treated as
“turnover” for a simple reason that the buyer of the scrap is a
person who is primarily dealing in scrap. In the case on hand, as
the respondent-assessee is not primarily dealing in scrap but is a
manufacturer of stainless steel utensils, only sale proceeds from
sale of utensils would be treated as his “turnover”.
25. So as to be more accurate about the word “turnover”, one can either
refer to dictionaries or to materials which are published by bodies
of Accountants. The Institute of Chartered Accountants of India (
hereinafter referred to as the ‘ICAI’) has published some material
under the head “Guidance Note on Tax Audit Under Section 44AB of the
Income Tax Act”. The said material has been published so as to
guide the members of the ICAI. In our opinion, when a recognized
body of Accountants, after due deliberation and consideration
publishes certain material for its members, one can rely upon the
same. Para 5 of the said Note deals with “Sales”, “turnover” and
“gross receipts”. Paras 5.2 and 5.3 of the said Note are reproduced
hereinbelow, which pertain to the term “turnover”.
“5.2 In the “Guidance Note on Terms Used in Financial
Statements” published by the ICAI, the expression “Sales
Turnover” (Item 15.01) has been defined as under:-

“The aggregate amount for which sales are effected or
services rendered by an enterprise. The term `gross
turnover’ and `net turnover’ (or `gross sales’ and `net
sales’) are sometimes used to distinguish the sales
aggregate before and after deduction of returns and trade
discounts”.

5.3 The Guide to Company Audit issued by the ICAI in the year
1980, while discussing “sales”, stated as follows:

“Total turnover, that is, the aggregate amount for which
sales are effected by the company, giving the amount of
sales in respect of each class of goods dealt with by the
company and indicating the quantities of such sales for
each class separately.
Note (i) The term ‘turnover’ would mean the total sales
after deducting therefrom goods returned, price
adjustments, trade discount and cancellation of bills for
the period of audit, if any. Adjustments which do not
relate to turnover should not be made e.g. writing off bad
debts, royalty etc. Where excise duty is included in
turnover, the corresponding amount should be distinctly
shown as a debit item in the profit and loss account.”
(emphasis added)

The aforestated meaning given by the ICAI clearly denotes that in
normal accounting parlance the word “turnover” would mean “total
sales” as explained hereinabove. The said sales would definitely not
include the scrap material which is either to be deducted from the
cost of raw material or is to be shown separately under a different
head. We do not see any reason for not accepting the meaning of the
term “turnover” given by a body of Accountants, which is having a
statutory recognition.
26. If all accountants, auditors, businessmen, manufacturers etc. are
normally interpreting the term ‘turnover’ as sale proceeds of the
commodity in which the business unit is dealing, we see no reason to
take a different view than the view normally taken by the persons who
are concerned with the said term.
27. In addition to the above factors, which we have considered for
understanding the meaning of the term “turnover”, we should not miss
the purpose with which the said term has been incorporated in Section
80 HHC of the Act.
28. The intention behind enactment of Section 80HHC of the Act was to encourage export so as to earn more foreign exchange. For the said purpose the Government wanted to encourage businessmen, traders and manufacturers to increase the export so as to bring more foreign exchange in our country. If the purpose is to bring more foreign exchange and to encourage export, we are of the view that the legislature would surely like to give more benefit to persons who are making an effort to help our nation in the process of bringing more foreign exchange. If a trader or a manufacturer is trying his best to increase his exports, even at the cost of his business in a local market, we are sure that the Government would like to encourage such a person. In our opinion, once the Government decides to give some benefit to someone who is helping the nation in bringing foreign exchange, the Revenue should also make all possible efforts to encourage such traders or manufacturers by giving such business units more benefits as contemplated under the provisions of law. 29. For the aforesaid reasons, we are of the view that the view expressed by the High Court is in conformity with the normal accounting practice followed by the traders, including the respondent-assessee and it was justified in coming to a conclusion that the proceeds generated from the sale of scrap would not be included in the ‘total turnover’. 30. For the aforesaid reasons, we dismiss the appeal with no order as to costs.
31. In view of the order passed in the Civil Appeal No. 5592 of 2008,
Civil Appeal Nos. 3283 of 2009, 4491 of 2009 and 4898 of 2010 are also
dismissed with no order as to costs as the legal issues involved in
these appeals are same.